Part Three: How I Achieved Personal Financial Self Mastery

Spotting Trends and Reducing Overhead

Do you know, I mean really know, where you spend your money each month? 

How much you spend in auto expenses like gas, insurance, repairs and maintenance? 

On food from the grocery, or restaurants, or at coffee shops? 

What you spend on your home; the utilities, taxes, insurance, maintenance and repairs? 

On travel like airfare, Uber, hotels, tolls and taxis? 

What about on shopping for clothes, or on Amazon, or how much you spend on your phone, or on music, or on video services like Netflix and Hulu? 

I’ll bet you don’t.  You may think you do, but you really don’t know. 

Don’t worry, I didn’t either.

As a salesperson I was at a disadvantage when it came to tracking my finances.  I lacked tools and resources to optimize my irregular income. 

I am also BUSY!

Trying to hit my goals, and earn as much money as I possibly could by making sales! I didn’t have time to meticulously record every purchase, then catalog it, and then go back and manually review it.

On the other hand, business owners have all kinds of resources, like specialized software designed to track their inventory, shipments, and billing. And they employ bookkeepers and accountants to further help analyze their income and expenses. 

Being on my own, with no easy way of understanding the reality of my spending, I had little chance of optimizing my cashflow.      

Getting Down to Business

A business may discover, after analyzing historical spending, that they’re spending too much money on office supplies compared to previous years.

This discovery can lead to action.  Without the knowledge, nothing would happen.  And there might be multiple solutions, like negotiating better terms with their current vendor, or seeking new suppliers who charge less.

They may also discover their payroll has swelled to an all-time high, prompting a closer look at the entire organizational structure.  This may lead to a decision, for example, to outsource janitorial services rather than employ a full-time janitor. 

But without the data there is no ability to spot trends, and therefore nothing would have changed. 

So why wouldn’t we, as CEO’s of our personal financial enterprise, not follow this proven model of success?         

How to Automatically Track your Finances for FREE

When I was in debt, not only did I lack control over my personal finances, I lacked vision into how I spent my money.  For example, every month I would declare $600 as my monthly budget for automotive expenses, but I didn’t really know.  I knew my car payment was $350, and I also bought gas and paid for oil changes.  It was a best guess. 

I didn’t have a good way of tracking all of my auto-related expenses.  I couldn’t fully comprehend my spending habits until I started using the online personal finance website, Mint.

For those of you who don’t know, Mint is a personal financial website used by over 20 million people.  It’s owned by INTUIT, a highly successful software company who also created Turbo Tax and Quick Books.

Quick Books, by the way, is one of the most popular financial software programs for small to medium sized businesses.

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I consider Mint an ESSENTIAL tool for anyone to achieve self-mastery over their personal finances. And frankly, I’m shocked at how many of my fellow salespeople have never heard about it.

Mint collects data from all of my accounts; checking, savings, credit cards, utilities, insurance, investments, loans, and more.  And then organizes everything so I can analyze trends and patterns in my spending habits.

This is done automatically.  No effort on my part.  All I have to do is provide my login information for each account, Mint securely does the rest – for free.

The only thing Mint lacks is a way forecast beyond one month, hence the reason I came up with my quarterly cashflow planner.  But I use Mint to supply my planner with the necessary data. 

After just a few months I quickly noticed a difference in what I thought I spent – and what I actually spent.

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Let’s revisit my auto-related expenses.  I thought they were about $600 per month, but in reality, it was more like $1,000 a month.  A BIG difference, how could this be? 

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Well, I wasn’t factoring in the entire universe of repair and maintenance expenses like oil changes, tires, windshield wipers, brakes, and more.  And I vastly underestimated how much gas I bought, and – oh yeah! – car insurance.  Without insurance or maintenance my spending WAS around $600 per month.

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After this revelation, I decided $1,000 was high, but it was a justifiable expense.  I drive a lot for my job.  I have an older car that requires a bit more maintenance.  And again, it was an average. 

I don’t spend $1,000 every month – most months were around $600.  But there were two or three events each year tipping my average higher, like when I paid my entire insurance bill, or when I replaced the tires. 

I came to peace with this expense, and verifying it allowed me to project the rest of my expenses more accurately. 

The advantage of knowing my true spending helped create benchmarks for future projections.  Greater visibility shed light on other areas where I could improve – like what I spent on entertainment.

How to be an Idiot

I was a complete idiot from the age of 21 to 30.  I spent heaps of time and money at bars and nightclubs, drinking and smoking like I was some party animal rock star.  I was able to afford some of this debauchery as a hotshot salesperson with the occasional big commission check.

But I was spending money like a professional athlete, the one who cashes their first big check, then picks up every bar tab, and buys his mom a house.  Only I wasn’t earning that kind of money. 

I also gambled excessively on football and basketball. Always striving to be a big shot I’d typically bet $100 or more on each game.

There were trips to Las Vegas twice a year where I’d blow five to ten thousand dollars per trip. And I’d play poker at least once a week, potentially winning but often losing hundreds more.

Oh, and don’t let me forget about golf.  I started playing with some real sharks, with hundreds of dollars at stake, sometimes on each hole.  It was nerve racking, but it made me feel cool!

Over time, I don’t care what anyone tells you, in the long run, about 99% of all gamblers ultimately lose their money. Including me.

After analyzing my spending on Mint, I figured out that partying and gambling devoured half of my paycheck for several months of the year, causing me to run a massive deficit, or negative cashflow. No wonder I fell into a quarter of a million dollars in debt.

And I didn’t fully realize the impact it was having on my entire financial world until I saw the trend in Mint. Just like any business would do to boost profits, once I had visibility into my entertainment excess, I took steps to drastically reduce this lunacy.    

Variable vs. Fixed Expenses

What’s important to consider about our expenses is most of them are variable– meaning  they fluctuate from month to month – AND we’re not legally bound to pay them like an auto loan, or a mortgage.  For example, some months I spend way too much on wine, but, if and when I need to cut back – I can.  I didn’t sign any legal document requiring me to buy wine each month.

I spend about $100 each month at Starbucks, I’m addicted to their green iced tea.  I’ve come to peace with my addiction, but if I have to, I can stop. 

The opposite of variable expenses are fixed expenses, and they are what lead people into financial slavery. In the business world expenses are referred to as overhead, and usually the biggest fixed expense for any business is payroll.  When companies are forced to reduce overhead, they usually start by laying off employees.   

In personal finance the largest fixed expense is typically a mortgage, then food, followed by auto or credit card debt.  Increasingly, it’s also college debt. 

What dug me into $250,000 of debt was a combination of poor cashflow management and fixed expenses that were too high in relation to my income.

I quickly got out of debt when I reduced my fixed expenses to about half of my take home pay.  For example, I paid off my car, I sold my house and rented for a while.  And I got rid of all my revolving credit card debt. 

This reduction in fixed overhead vastly improved my personal profitability.    Below is a simple chart I update occasionally; it reminds me of how much flexibility and freedom there is to having low overhead.  Here I sort out fixed vs. variable expenses, what I pay for in cash vs. credit, and the percentage impact on my total spending. 

No business thrives without knowing their financial data, and regardless of how much money I earned, I never realize my true cashflow potential until I began using Mint to track my income and expenses.

In the fourth and final post of this series, I’ll describe how to utilize credit for almost two months and not have to pay a bill – or a single dime in interest.  I call it Credit Card Arbitrage, and I use it to smooth out the peaks and valleys of my straight commission income.